Question

Howarth Manufacturing Company purchased a lathe on June 30, 2014, at a cost of $115,000. The residual value of the lathe was estimated to be $10,000 at the end of a five-year life. The lathe was sold on March 31, 2018, for $34,000. Howarth uses the straight-line depreciation method for all of its plant and equipment. Partial-year depreciation is calculated based on the number of months the asset is in service.

Required:
1. Prepare a schedule to calculate the gain or loss on the sale. (don't need)
2. Prepare the journal entry to record the sale.
3. Assuming that Howarth had instead used the sum-of-the-years’-digits depreciation method, prepare the journal entry to record the sale.

Answer 1

1) Depreciation expense per year = (115000-10000/5) = 21000 per year

2014 dep = 21000/2 = 10500; 2015 dep = 21000; 2016 dep = 21000; 2017 dep = 21000; 2018 dep = 21000*3/12 = 5250

Book value of march 31,2018 = (115000-78750) =36250

Loss on sale = 36250-34000 = $2250

2) Journal entries

Date	account and explanation	debit	credit
mar 31	Cash	34000
	Accumulated depreciation-Lathe	78750
	Loss on sale of Lathe	2250
	Lathe		115000
	(To record sales of lathe)

3) depreciation expenses

Year	Depreciation expense
2014	105000*5/15*6/12 = 17500
2015	105000*5/15*6/12+105000*4/15*6/12 = 31500
2016	105000*4/15*6/12+105000*3/15*6/12 = 24500
2017	105000*3/15*6/12+105000*2/15*6/12 = 17500
2018	105000*2/15*3/12 = 3500

Accumulated depreciation = 94500

Date	account and explanation	debit	credit
mar 31	Cash	34000
	Accumulated depreciation-Lathe	94500
	Gain on sale of Lathe		13500
	Lathe		115000
	(To record sales of lathe)